Before purchasing a life insurance policy, it’s important to know why you’re buying one in the first place. Insurance proceeds can be used to ease a number of financial obligations such as college education, mortgage payments, funeral expenses, debt and day-to-day expenses. A life insurance policy is a legal contract between the insured and the insurer – typically a life insurance company, and it requires premium payments and guarantees payment to the insured’s beneficiaries when they die.
Consumers are often unaware of the many benefits that life insurance can provide for both the insured and their beneficiaries. There is another misconception that purchasing a life insurance policy is too expensive. This isn’t necessarily true as life insurance rates are currently at an all-time low which makes purchasing a policy even easier. A policy can also help secure a family’s well-being long after a breadwinner passes away.
Life Happens, a nonprofit organization dedicated to helping Americans take financial responsibility through the ownership of life insurance and related products, offers an easy-to-use insurance needs calculator on their website.
Below are some of the top reasons for purchasing a life insurance policy:
Proceeds from a life insurance policy can help supplement the loss of income a family may face when the insured passes away. It is recommended to purchase a policy that is five to seven times your annual salary.
Burial and Other Expenses
According to the National Funeral Directors Association, the average funeral is the United States can cost approximately $10,000, which can leave quite a financial burden. However, life insurance can help subsidize or cover this as well as other final expenses – such as medical bills.
Transfer Family Wealth
You can leave more money to your family with a life insurance policy as part of your estate.
With the price of college tuition on the rise, life insurance proceeds can help ensure that college loans are paid even if you are not there to help. This may be a temporary need that should be re-evaluated after all of your children have graduated from college.
Supplement Employer-Provided Life Insurance
Nowadays, most companies offer some sort of group life insurance for their employees but may not adequately cover all of a family’s financial needs. Industry experts recommend purchasing an additional, individual life insurance policy to help cover the rest. Keep in mind that if you leave your job, your coverage does not come with you.
When an estate is inherited, there are many taxes that your beneficiaries will have to cover, such as income taxes, federal estate and state inheritance taxes. The good news is that an insurance policy can help cover those taxes.
Locking in a Low Premium
As with any other type of insurance, life insurance premiums increase as people age. To optimize benefits, it is recommended to purchase a policy at a young age so you can lock in a low premium for years to come.
Life insurance proceeds can also be awarded to the insured’s favorite charity or charities. This could be done by donating the entire policy or by naming the charity as a beneficiary. Regardless of the situation, donating all or parts of a policy can make a huge difference for the organization.
A policyholder can utilize an insurance policy that builds cash value by purchasing a policy that offers tax advantages. This is especially important for high-income earners.
Life insurance proceeds can help pay off a mortgage, credit card debt, an outstanding loan or any other type of debt. Using a life insurance policy to pay off these debts will lessen the burden for the insured’s beneficiaries.